CalPERS Sues Ex-Lehman Execs & Underwriters, Alleging a 'Fraudulent Scheme'

(February 8, 2011) — The California Public Employees’ Retirement System (CalPERS) has sued former Lehman Brothers Holdings Inc. executives and underwriters, alleging that they concealed Lehman’s exposure to subprime loans.

CalPERS, the largest US public pension fund, said in a complaint filed in San Francisco federal court that the executives of 34 investment banks — including Citigroup, Wells Fargo Securities and Bank of New York Mellon — made misleading statements in offering documents for bonds issued from June 2007 to September 2008.

“Lehman’s executives…made materially false statements about its financial condition causing Lehman’s stock and bond prices to be artificially inflated,” the suit stated. “When Lehman’s losses and exposure came to light, the revelations led to severe declines in Lehman’s stock price and ultimately to its bankruptcy. Lehman also had engaged in manipulative quarter-end transactions called “REPO 105″ transactions that hid billions of dollars of Lehman’s debt from the public,” the lawsuit asserting, referring to the accounting practice that allegedly allowed Lehman to hide the extent of its use of borrowed money, or leverage.

Defendants named in the lawsuit include former Lehman Chief Executive Officer Richard Fuld and Citigroup Inc.’s Citigroup Global Markets unit. In September 2008, Lehman filed the biggest bankruptcy in US history, listing $613 billion in debt.

Despite the losses claimed in the lawsuit, last month saw the giant fund return to its pre-Lehman levels. The gains, according to the fund, reflect a repositioning of CalPERS portfolio to take full advantage of the overall gains in the market last year. CalPERS private equity program – the Alternative Investment Management (AIM) Program – was the biggest gainer among asset classes in 2010, with a 21.5% overall return. CalPERS Global Equity investments returned 14.6% last year, with domestic stocks gaining 17.3% and international stocks returning 12.8%. Both portfolios beat their benchmarks. Other CalPERS asset classes that also saw strong returns last year were Global Fixed Income, up 11.6%, and Inflation Linked Asset Class, which includes infrastructure, commodities, inflation-linked bonds and forestland, up 7.8%.

Pensions have been aggressively suing financial institutions in the wake of huge losses during the economic downturn. In April last year, records released to US Rep. Mary Jo Kilroy of Columbus, Ohio, showed the state’s public pension funds took a $480 million hit to investments in the wake of the collapse of banking giant Lehman. The state of Oregon sued former financial giant Bear Stearns, alleging the company issued misleading information about securities. The state attorney alleged that the losses at Bear Stearns — accused of exaggerating the value and quality of the securities they sold — are directly attributable to misleading filings in connection with mortgage-backed securities. “We believe that these junk investments were intentionally mislabeled, and all Oregonians are still reeling from the economic fallout,” Oregon Treasurer Ted Wheeler said in a statement obtained by the Wall Street Journal. “If you hurt Oregonians financially, we are coming after you.”

Internationally, one of Sweden’s largest pension funds sued Bank of New York Mellon in November for more than $35.5 million over investment losses. Första AP-fonden (AP1) filed the lawsuit against BNY Mellon, which was acting as the fund’s custodian bank and lending agent, with the Commercial Court in London. The scheme alleged that losses suffered by Första AP-fonden during 2008 were a direct result of investment decisions taken by BNYM on Första AP-fonden’s behalf.